Company Law Reform
Article by Marco Dellapina
The Companies Act 2006 received the Royal Assent on the 8th of November 2006 and is the largest single piece of legislation ever passed in the UK comprising 885 sections and 15 schedules. The Act will affect every company director, secretary and shareholder as well as the public generally and will be of interest to anyone involved in business.
The Government's stated objectives are to encourage small companies, to promote shareholder involvement and to foster a long term investment culture. The Act will be fully implemented by the 1st of October 2008 throughout the UK as opposed to just England and Wales and will be brought into force in stages between now and then by an expected 70 sets of regulations. The DTI has promised a timetable of when the provisions will be brought into force by the end of February 2007, although it is anticipated that the Act will be substantially operative by Autumn 2007. It has been advised that companies should make appropriate use of the transitory period to 'put their houses in order'.
So what will be the impact of this new law on the public generally? Well, UK companies will now be required to be more accountable for their actions to the public at large as opposed to just their shareholders. Over 1000 plc's will now be legally required to report on their social and economic impact and directors of all UK companies will be legally obliged to minimise any damage their company does to local communities and to the environment. Some campaigners have stated that this does not go far enough; in particular, it has been proposed that people overseas who have been harmed by the activities of a UK company should also be able to take action against them in the UK courts. It has been conceded however, that this is the first time that such responsibilities have been written in UK company law. In fact, one such campaigner, the 'Trade Justice Movement', has stated that it knows of "no other country in the world that demands in law this kind of responsibility from company directors".
As far as shareholders are concerned, Part 11 of the Act effectively abolishes the rule established 150 years ago in the case of Foss v Harbottle that shareholders cannot sue directors. Under the old 'Common Law', where a wrong has been done to the company, only the company may sue for damage caused to it, save for limited exceptions. Part 11 widens the scope allowing shareholders the right to bring 'derivative claims' in respect of a cause of action arising from an act or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of a company.
The Act has generally received a warm welcome from directors of small companies. The reforms introduced for private companies include the streamlining of decision-making, simplifying the rules relating to share capital and generally making it easier to set up and run private companies. The requirement for private companies to have a company secretary has now gone. The requirement to hold annual general meetings or any other meeting for that matter has also been dispensed with in the case of private companies. This means that private companies will now no longer be required to 'lay their accounts' on shareholders or to appoint an auditor at their AGM, although shareholders will still be entitled to receive a set of the company's accounts. Written resolutions will no longer require the unanimous consent of the shareholders eligible for voting; instead each shareholder will receive one vote for each voting share that they hold and, in the case of a written ordinary resolution, the written resolution will require a simple majority and, in the case of a written special resolution, the written resolution will require a majority of 75% of all those shareholders eligible to vote. Accordingly, the existing regime relating to elective and extraordinary resolutions will be abolished. Notice periods for convening members' meetings have also been reduced as have the requirements for meetings at short notice. Another key change which has been introduced by the Act is that directors will now be free to allot shares without first seeking authority from the company's shareholders. However, perhaps the most significant change for private companies is the abolition of the restriction preventing them from giving financial assistance for the acquisition of their own shares.
People will now be able to incorporate and run a company online. New companies will now have a single constitutional document consisting solely of the Articles of Association doing away with the old style Memorandum of Association. The subscribers will simply have to state that they wish to form a company and agree to become members of it. The requirement for an authorised share capital has been abolished although a statement of capital and shareholdings will have to be delivered to Companies House detailing the company's share capital and aggregate value of any class of shares. A company will be able to validly execute documents with the signature of a single director in the presence of a witness, rather than the current practice requiring documents to be executed by two directors or one director and the company secretary or by company seal.
A fundamental change to the law is the introduction or rather the codification of the seven key duties of a director, as follows:
1. to act within his/her powers
2. to promote the success of the company for the benefit of its shareholders as a whole
3. to exercise independent judgment
4. to exercise reasonable care, skill and diligence
5. to avoid conflicts of interest
6. not to accept benefits from third parties
7. to declare to the other directors any interest in a proposed transaction or arrangement with the company
Lord Hodgson commented on this last year: "To put it in vulgar, non-legal terms, people who have spoken to us fear a double whammy. In Part 10, directors' duties are widened, while Part 11 makes it easier for shareholders to commence actions against directors. There is concern. Is it justified? That is what we are trying to find out in Committee…"
There are some safeguards for directors which have been introduced by the Act. For example, in response to the recent much publicised animal rights campaigns, those directors who wish to maintain their secrecy, or who work in a particularly sensitive industry, will no longer be obliged to disclose their home address on the public record; they may simply provide a service address which can be the company's registered office.
At Dellapina Law we can help you to take advantage of these changes by reviewing your company's constitution and legislative compliance. We can offer a complete service including bespoke incorporations and we can carry out all of your statutory requirements with regard to Companies House filings and maintenance of statutory books. We also provide company secretarial services and you can use our office as your company's registered office. We also advise on all other forms of businesses including sole traders and partnership law and we can advise you on which form of business would be most suitable for your particular requirements.
For a free no obligation consultation please call Marco Dellapina on 01565 634 100 or e-mail marco@dellapina.co.uk or you can simply visit our office at Caledonian House, Tatton Street, Knutsford, Cheshire, WA16 6AG.
Before he moved to Knutsford in 2005 to set up office, Marco practised law in the City of London where he acted for major institutional clients including plc companies, banks and a premiership football club. Marco advised on all aspects of commercial law, company law, intellectual property and trade marks, mergers, acquisitions and group structures.
